CONSUMER MISTAKES IN BERTRAND GAMES

The identical agent, identical good Bertrand game is associated with prices at marginal cost — the Bertrand Paradox. If consumers make occasional mistakes I show that the standard Bertrand game gives rise to positive profits and prices above marginal cost. Some firms charge low prices to capture the bulk of the sales while others charge high prices selling to mistaken consumers. Furthermore, with free entry the Diamond Paradox arises; a full measure of the firms choose the monopoly price. As a result, the Diamond Paradox arises in an environment with zero search costs by replacing searching costs with searching errors.